Discounted present value, Financial Accounting

A player for a Rice team, Jim Jones, is graduating this year and is considering a career in professional sports. The alternative is to work for two years and then attend business school for two more years before taking a job in finance. The professional sports career involves an up-front signing bonus of $500,000 followed by guaranteed salaries over the next ten years of $750,000 per year (in real yearend values starting at the end of the first year). Assume that the professional sports career ends after 10 years, at which time Jim could expect to earn an income of $75,000 per year (in real terms) growing at 1 % per year for the next 30 years. The business career would involve earning $75,000 this year, $78,000 next year, and spending $30,000 per year for the following two years while attending business school (all amounts measured as end of year real values). Upon graduation, however, Jim could expect a starting salary of $140,000 (in year-end values) growing at 7.5% (in real terms) for the next 35 years.

(a) If the appropriate annual effective discount rate is 4.5%, show that the earnings stream associated with the professional sports career has the larger discounted present value.

(b) If Jim desires to maintain a constant level of annual consumption at a discount rate of 4.5%, what would his annual real consumption be?

(c) What financial assets should Jim have at the end of his first year of employment?

(d) How much should Jim have invested the year that he ceases being a professional athlete?

Posted Date: 2/22/2013 4:48:34 AM | Location : United States







Related Discussions:- Discounted present value, Assignment Help, Ask Question on Discounted present value, Get Answer, Expert's Help, Discounted present value Discussions

Write discussion on Discounted present value
Your posts are moderated
Related Questions
Ask questiJohn’s away at the moment, and his email provider has a size limit on the data that can be sent via email. What is a potential solution for John, and name a provider that

Vantage Company issued bonds with a $500,000 face value and a 6% stated rate of interest on January 1, 2013. The bonds carried a 5-year term and sold for 95. Vantage uses the strai

Maghrabi Enclosure follows a moderate current asset investment policy, but it is considering whether to shift to a different strategy. The firm''s annual sales are $500,000; its f

Question 1 a. Contractual liability may be discharged in certain circumstances. Discuss. b. "An aggrieved party in a breach of contract is entitled to claim for damages"

The following items are found in the trial balance of M/s Sharada Enterprise on 31st December, 2000. 10 marks Summer 2013 Sundry Debtors Rs.160000 Bad Debts written off Rs 9000 Dis



Interest revenue: At the end of 2012, a manufacturer sells machinery to a customer for $90,000. $30,000 is paid immediately, and the customer signs a promissory note for the r

Can you help me with that?

Agreements to settle property The trustee is not bound by such an agreement if it remains executory. If property has already been settled, the trustee can recover it unless it